Trader's Daily Notebook: Yellen Keeps the Punch Bowl Intact

The bottom line is no one knows why the market rallied so smartly.

Fed Chair Janet Yellen came through for bulls Wednesday, hiking rates by a quarter-point (to a target range of 0.75% to 1%), but then indicating the Fed would move slowly toward hiking rates back to historically normal levels. Put another way, Yellen gently tugged on the punch bowl, but didn't come close to yanking it away altogether.

Leading up to Wednesday afternoon's FOMC meeting announcement, the E-Mini S&P 500 futures (Es) were trading relatively well. The contract opened at 2368.75, well above Tuesday's 2362.75 close. And aside from the initial 15 minutes of trading when scalpers tried to fade to opening strength, the contract remained comfortably above the session's developing volume weighted average price (VWAP). A brief study of the intraday Es chart below paints a pretty clear picture that traders, aside from those trying to fade the open, should not have been trying to press a day timeframe short position.

When the FOMC meeting announcement hit the wires at 2 p.m. ET, the contract was trading above the opening print, above the developing VWAP and above our 2370.50 upper-level pivot (highlighted in the morning's Trader's Daily Notebook). While it's not always possible for heavily biased traders to adopt a bullish posture in a tape they're unable to trust, I hope sufficient evidence and prep work was presented beforehand to keep anyone from blindly pressing an aggressive short.

The bottom line is no one knows why the market rallied so smartly following the FOMC announcement. The simplest explanation might be that it's a bull market. And as frustrating as it may be to those who insist the market is widely overvalued, the path of least resistance will remain higher until higher timeframe price momentum begins to break down and major reference points, such as prior swing lows, the year-to-date VWAP and 50-day and 200-day moving averages, are shattered.

As we head into Thursday's session and Friday's quadruple witching expiration, traders of the Es should consider pivoting off 2372 to 2374. As long as any dip attracts responsive buyers within that two-handle range, my expectation is for a near-term test of the big figure (2400).

I don't want to move on to Thursday's Es trade plan without first sharing charts of the U.S. dollar futures, gold futures and the SPDR S&P Bank ETF (KBE) .

Beginning with the dollar contract (Dx), we can't ignore the sharp decline that occurred following the FOMC meeting announcement. After recapturing all short and intermediate timeframe moving averages, along with the year-to-date (YTD) VWAP, the Dx contract collapsed Wednesday, forfeiting several weeks of seemingly bullish consolidation. Since I'm rarely a fan of standing in front of a fast-moving market, my inclination is to avoid stalking longs in the dollar, and wait to see how buyers respond near the long-term up trend line (in yellow on the chart above) and 200-day moving average.

There was quite a bit of excitement surrounding gold's move from $1,200, and back above the YTD VWAP during Wednesday's auction. If you're trading gold long, don't fall in love with your position as price still has a major hurdle near $1,270 and the 200-day moving average. The best part of Wednesday's rally is traders have increased confidence in the importance of gold holding $1,200. A close under that figure likely triggers a sprint, among all timeframes, for the exit.

I'm including a chart of the KBE because I don't want folks to forget about the one group that most expect to outperform in a rising rate environment. While I don't currently see a reason to be longer-term bearish on the sector, I do expect a close under $44, to trigger a quick washout. That would leave the KBE beneath the 50-day moving average and YTD VWAP, and likely offer buyers a shot at buying closer to $41 to $42.50.

Moving on to Thursday's Es auction, we're primarily concerned with identifying a buying opportunity toward 2372 to 2374. Assuming responsive buyers don't exit the auction within that two-handle zone, our baseline expectation is for an eventual drive beyond 2385.75, and on toward 2393 and 2398. Those wanting to avoid fighting a potential rally to new contract highs should simply not sell short as long as price is above the low 2370s.

A failed trade from the low 2370s would be expected to trigger excitement among short-sellers, as the odds of downside volatility finally begin to escalate. A break of 2372 immediately shifts our focus toward 2365.25, 2359.25 and 2354.50. And a close under the mid- to upper 2350s is likely all it will take to get everyone who turned bullish on Wednesday to toss their newly acquired long positions into the trash and seek shelter once more.

Any trading or volume profile related questions can be posted in the comments section below, emailed to me at parkcityyeti@gmail.com or posted to my Twitter feed @ByrneRWS

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At the time of publication, Byrne had no positions in the stocks mentioned.

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